The Bakery Fire and the Number That Was Too Round
A bakery in Nakuru claims KES 2.95 million in lost profit after a fire closed its main production line for 11 weeks. Its accountant multiplied the average monthly profit for the 12 months before the fire (KES 1.18 million) by 2.5 months. You are instructed by the insurer to review the claim. Your file review shows: the 12 months included a national school-feeding contract that generated KES 470,000 of gross profit per month and ended two months before the fire; a competing bakery opened 3km away in the same period; the management accounts were never adjusted for KES 600,000 of the owner's personal expenses run through the business; and two of the 11 weeks fell in the annual December shutdown when the line would have been idle in any event. The claimant's accountant says his figures are 'the company's own records and therefore beyond dispute'.
1. Recalculate the loss, stating every assumption, and explain the direction of each adjustment.
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Start from the claimant's own base, then correct it in both directions.
Step 1 - Adjust the baseline for the owner's personal expenses. KES 600,000 / 12 = KES 50,000 per month of profit that was understated. This adjustment increases the baseline: 1.18m + 0.05m = 1.23m. An expert who only makes adjustments adverse to the claimant is not an expert; make this one and say so.
Step 2 - Remove the discontinued contract. The school-feeding contract contributed KES 470,000 of gross profit per month and had ended before the fire. The but-for world excludes it. 1.23m − 0.47m = 0.76m sustainable monthly profit. This is the single largest correction and it reduces the claim.
Step 3 - Correct the loss period. 11 weeks = 2.53 months. Less two weeks of the December shutdown during which the line would have been idle in any case = 9 weeks = 2.07 months, not 2.5.
Step 4 - Compute. 0.76m × 2.07 = approximately KES 1.57 million, before mitigation.
Step 5 - Mitigation. Establish what the claimant actually produced and sold during the closure (second line, outsourcing to another bakery, stock on hand). Any revenue achieved reduces the loss further. If, say, 30% of output was maintained, the figure falls towards KES 1.1 million.
Present as a range, not a point: roughly KES 1.0m–1.6m, with the assumptions on contract margin, mitigation and shutdown explicitly labelled. A single round number is the mark of an advocate, not an accountant.
2. How do you deal with the accountant's assertion that the company's own records are 'beyond dispute'?
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Reject the premise, respectfully and in writing. Management accounts are an assertion by management, not evidence of a fact; they are unaudited, prepared by the claimant, and in this case contain a known contamination (personal expenses). 'The company's own records' are the very thing in issue.
What you require instead:
- Audited financial statements for the three prior years, and the tax returns actually filed - compare declared profit with the management accounts. A wide gap is a serious credibility point.
- The school-feeding contract and its termination correspondence, plus the invoices and job costing that support the KES 470,000 monthly gross profit.
- VAT returns and sales ledger for the 12 months pre-fire and the closure period - third-party-derived data on actual sales, not management's summary.
- Bank statements showing receipts; a bakery's sales are mostly cash and card, and the bankings will not lie in the same way.
- Production records - flour purchases, electricity consumption, wage records - as a cross-check on claimed output, before and after.
- Evidence of mitigation and of the competitor's actual effect (local market data, lost customers).
Reporting judgement: state that the claim is not supported by reliable contemporaneous records to the standard required, quantify on the best available evidence, and disclose the limitation. If the underlying records are unreliable, the correct answer is a lower, defensible figure - not refusal to opine.
3. Identify the independence and reporting pressures in this engagement and how you manage them.
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Pressures present:
- Who pays. The insurer instructs and pays, but the subject of the report is the claimant, who has a direct financial interest. The claimant will allege the expert is the insurer's hired advocate.
- Repeat work. Forensic firms that produce consistently low numbers for an insurer get repeat instructions. That is a self-interest threat and must be managed, not ignored.
- Advocacy drift. The instinct to 'defend' a figure under cross-examination leads experts to overstate confidence and drop inconvenient adjustments (such as the owner's personal expenses, which help the claimant).
Management:
- Report as a range, with assumptions and sensitivity disclosed, and explicitly identify the adjustments that favour the claimant.
- Written engagement terms stating the expert's duty is to the tribunal and not to the instructing party, that fees are not contingent on the outcome, and that the report may be disclosed to the claimant and the court.
- Document the basis of every figure so the working papers support the report without reconstruction.
- Do not accept edits from the insurer. If the insurer presses for a figure the evidence does not support, record the pressure and decline; if it persists, consider whether you can continue.
- Be prepared to be cross-examined on the KES 50,000 adjustment - the fact that you made it voluntarily is your best answer to the charge of partiality.